Aussie families default on mortgage repayments after banks underestimate their spend

This dodgy tool used by banks is catching Aussie families out

Discuss

 

Customers generally declare living expenses that are less than these so called "dodgy tools" generate.
Anything for a good story though

 

I think that people need to take responsibility for their own actions. You work out your personal finances and figure out what you can afford to pay (plus a bit of buffer) in payments for an IP. If that happens to be $650K, then only borrow that, or less. If the bank says you qualify for $2M (as I've seen on some pre-approvals), then frame the letter and hang it on your wall for sure, but don't borrow the $2M, stick to the $650K.

 

"Unaware the interest only period would eventually end"

Don't people read things that they sign their name to?

 

Probably not when documents could run to 20 pages of small print and not

• a one page of dot points in LARGE print

 

Shouldn't have signed something which they didn't perform their own due diligence on and it's a valid contract anyway. In the past, I have requested amendments to documents because it contained information that were incorrect.

Not saying that the banks are completely blameless, but so easy to blame someone else when things are not going so well. It's such a cope out.

 

People are, or should be, aware of their own expenses.
Lying to the finance providers is their own fault if, or when, it ends badly.
Can’t blame the banks for everything that goes wrong.
Marg

 

The problem with the way lenders are applying living expenses now is that it doesn't give any consideration to what people will do when things get difficult for them. Lenders give no consideration to the difference between mandatory expenses (food, utilities, etc) and discretionary expenses (recreation).

I believe that there will always be people who will default on their mortgage and cry poor, it doesn't matter how much consumer protection you put in place. There will also always be people that will tackle adversity head on, make sacrifices and work through it.

The interest only example is particularly naive. For as long as I can remember, Westpac has written what the repayment before and after the interest only term will be on the very first page of their loan contracts.

 

with the turning of Sydney & Melbourne market, RC on the headline. not a surprise to see these articles, especially from News.com.

Blaming banks, blaming brokers, blaming .....

it is seems a easy way to make self comfort.

since when financial literacy becomes other ppl's responsibility, they need to take some responsibility.

 

What about borrowing $2M but not touching it if you don't need it instead.....like a large credit card, no debt use no interest to pay?

 

I don't think the banks, mortgage brokers or anyone else underestimated living expenses at the time and proof to that is that everyone has been just fine until now....
The issue - from what I am seeing - is whilst living expenses have gone up for everyone (utilities, general cost of living, kid's a little older), for investors in particular life will now be even more expensive than it used to be, because

1. lending criteria are tighter now, so people can't move around anymore for cheaper rates whilst their's have gone up 1-2% points in the last 2-3 years, and
2. banks now force everyone onto P&I loans, which - whilst lower than IO - add a few extra hundred dollars a month on the average loan repayment. So if someone happens to have 2, 3, 4 or more loans that would be really bad to the tune of a few more thousand dollars a month!

Now no one knows how things will go in the next year or so, but the most sensible thing for everyone to be doing right now, is to be building up their cash reserves

I should also say that from what I am seeing on rents, with all the oversupply, rents will be stable (at best) in Melbourne and Sydney until all this oversupply has been absorbed, which I fear has a little while longer to go!

 

But in the last 4 years interest rates have been going in the other direction. which has partly insulated many against rising prices
It was only 10 years ago when most were paying about 9.5% in interest on home loans.
WRT to living expenses different people have different ideas and older people would consider mobile phones and computers and tablets as a luxury , whilst younger people would have different ideas.
Try even applying for a job without a computer these days, many casual workers will just be sent text messages each day ,if they are required and the hours.
Then you have things like health insurance ?? different people have different ideas.
The public system isn't much help if you are on your feet all day , and cannot afford to wait months to get into hospital for non-emergency procedures.

 

Yes, they did start at 9.5% (or even 14% a few years before that!), then they came down to low 3s, but variable IO loans in the last 3 years have been pushed to late 4's and in my case to mid 5s! all while the Reserve Bank has kept the cash rate steady all this time

 

Are these people that ignorant to their own financial affairs? OMG....

There are a few layers of ignorance evident when you unpick what is stated in that story... it is not just the Household Expenditure Model calculator. Cross-collaterised properties, not understanding that an IO loan is not for forever, building a new house for themselves..... & they blame the bank?!! Oh please....

Some people just seem to struggle with “Adulting”.... It’s quite simple: Live within your means.

Blaming everyone but yourself is a red flag in itself.

 

Thats easy fixed don't have an IO loan.
There is heaps of cheaper rates out there for investors , but if you want all the "bells and whistles" you will generally pay more , 10-15 years ago most investors were paying about 1-2% more.
We bought our last IP 9 years ago and its virtually paid off .
If people want to go IO , thats fine , but dont complain when rates go up and you have been sitting on a property for years and have not even touched the principal , that just speculative investing.

 

Yikes indeed...not only did they not realize the IO would switch to P&I, they sold their home that was securing their IPs (which they couldn't cover anyway) to build a new home and ....surprise, surprise the bank doesn't want to release the funds to build. Can't believe they'd go on national TV to air their financial incompetence and blame everyone but themselves

 

Not sure its always the banks fault if a borrower can't meet repayments, but in the current climate, banks get blamed for bad weather. Outlining what the journalist didn't mention:

For a standard borrower for owner occupier purposes, there would have been a range of 'buffers' banks generally applied. How banks apply buffers is really up for regulator/policymaker debate, from a financial stability perspective, its important that they do it. Banks around the world do this differently. Whether its specifically on expenses, income, debt or assets, doesn't really matter. The key to it is to test whether a borrower can meet repayments in different conditions.

In Aus, a 2%+ assessment rate buffer based on the interest rate of the day would've been applied to the debt being applied for. Its quite likely this particular borrower would have got the loan at a different time too when rates were higher, therefore this 2% may indeed be 3-4%. Her furniture listed on her loan application really bears no bearing to her underlying ability to repay, so its a relatively redundant point. For those in this position that are 'defaulting', its more likely that its a change in circumstance (lower income) than poor origination standards.

For investors though, there were some larger failures in origination standards as the assessment rate buffer mentioned above wasn't properly applied across all debts by a range of lenders.

Generally speaking though, in todays climate, those that don't quite understand risk management and risk profiling are quickly becoming 'experts' (journalists, Royal Commission lawyers, media, etc). Those that actually know what they're talking about (bank risk management teams, specific financial stability regulators, etc), are best placed to assess how buffers should be applied. HEM has advantages and having broad based buffers applied elsewhere in calculations is likely a better model than microscopic line by line examination of ins/outs.

 

Redom, there is still one thing I remain curious about with the original assessment check. The bank looks at income (x) - expenses (y) = surplus (z). And for income, they do various shadings, such as taking 80% of bonus income and rental receipts amongst other things. In outgoings, they assume additional ~2% on mortgage i Rates for the purpose of calculating commitments on existing and new loans, etc. That is all understood, but what about the surplus, how high does the z have to be? Clearly a negative z means rejection. But if you get a z just slightly > $0, will that be sufficient? How high does the z have to be? I am only seeking a general guide as I know this may vary by lender.